Years of heavy investment are finally showing up more clearly in Discovery’s earnings, cash generation and dividend.
Investors have so far been eager to buy into CEO Adrian Gore’s big bets. “I think the market is usually quite generous to us, frankly,” he tells the FM.
Discovery’s share price, now at R259.70, has gained 17.99% over the past year and 75.72% over three years, a strong run that suggests investors have already rewarded much of the progress made across the group.
The latest results gave investors even more reason for confidence. Normalised operating profit rose 17% to R17.75bn, cash conversion reached 85% and the full-year dividend jumped a whopping 33% to 384c a share.
Shaakir Salie, head of research at Aeon Investment Management, says the dividend was the real surprise. Discovery had already guided investors to a strong operating performance, but the bigger payout “positively surprised investors, reflecting the new phase of robust cash generation”.
For much of the past decade, investing in Discovery required a degree of patience. The group spent heavily on new businesses, notably Discovery Bank, while trying to extend its Vitality model across increasingly disparate international markets.
Discovery Bank, loss-making just a year ago, delivered R370m in normalised operating profit.
Salie says Discovery Bank’s progress is “remarkable”.
Its 1.6-million clients are important, he says, but more telling are the costs per customer, which continue to fall even as revenue per customer rises, creating considerable operating leverage as the digital bank scales.
So, has Discovery finally reached the point where shareholders can sit back and enjoy the fruits of all that investment? “We spent 10 years building and investing,” Gore says. “This five-year cycle is about growth.”
He says stronger growth and cash conversion should instead give Discovery the ability to keep building. “If the model works as we think it can, it should set us up for continuously building that growth.”
Discovery’s ambitions remain large. Management is aiming for about R3bn profit in the bank by 2029, though Salie cautions that investors “shouldn’t expect that climb to be a straight line”.
About 1,000 customers are joining the bank each day, Gore says, and about 70% of them are not existing Discovery customers. Conversely, Gore estimates fewer than a quarter of Discovery’s existing customers bank with the group.
“If you go from both sides, you’ve got potential for huge growth,” he says.
That is where Discovery’s imminent “super bank” strategy comes in. Rather than the Discovery Bank remaining one product alongside the health, life, invest and insure divisions, the company wants it to become an increasingly central interface into the broader ecosystem.
Salie says investors will therefore be watching cross-selling closely. About half of bank customers appear to have a Discovery Health relationship, while far smaller proportions use the group for insurance or investments.
Gore insists this will not simply mean bombarding customers with products. “We’re not cross-sellers,” he says. The task is to create enough value so that customers voluntarily move across the group’s offerings.
Beyond South Africa, Vitality Health in the UK was one of the year’s standouts. Salie believes its performance reflects years of management work to correct pricing and improve the quality of its customer base.
Healthier members are also claiming less and staying longer, he says, suggesting “perhaps this points to a more durable performance than the market expects”.
China’s Ping An Health continued to make a strong profit contribution despite a slower growth profile and fiercer competition.
And then there is Vitality AI. Developed with Google, the platform combines AI with Discovery’s health and behavioural data to offer increasingly personalised health interventions. It is costing the group about R300m a year, but Salie says it “could become another Discovery Bank story”.
“Discovery owns a rich and valuable set of behavioural and health data,” he says, “and AI only amplifies that value.”
Gore’s new book, The Four Principles, sets out four ideas he says have shaped the way he operates: disciplined optimism, focused urgency, declared goals and the “Pareto tail” — the belief that a small number of unusually consequential decisions can have an outsized impact on everything that follows.
Ask him how those principles apply to Discovery today and he immediately points to the group’s publicly declared earnings goals, the urgency imposed by hard launch dates and, finally, the bets he hopes can alter its trajectory.
“I’m hoping that the super bank and Vitality AI are tail events,” Gore says. “In other words, they create this discontinuity that changes everything.”
